The Financial Services Authority (FSA) has today signalled fundamental changes to the mortgage market despite it being a dead authority walking.

The background is that a detailed study by the FSA has found that:

  • Almost half of new mortgages from 2007 until early 2010 were given without verifying the borrower’s income. These would have been given out on a ‘self-certification’ or ‘fast track’ basis.
  • 46% of mortgaged households had no money or were in deficit at the end of every month.
  • The share of interest only mortgages has been increasing. Many of these have no credible plan in place to repay the capital owing either during or at the end of the term.

In an attempt to get mortgage lending on a path of ‘back to basics’ the FSA has made some key proposals.

Lenders must not only assess all borrowers for affordability but also take on the ultimate responsibility for that assessment. This will mean a far deeper assessment of the borrower’s income over expenditure. This will cost more as some lenders still ‘fast-track’ clients with good credit histories to save time and money. A fast track mortgage is a self-cert in all but name except the lender reserves the right to call for proof of income at any stage. Now every application will have to attract greater scrutiny. Not only that, but if a client opts for an interest only mortgage can it be called truly affordable if they are just hoping for a windfall or future price rises or inflation to erode the debt away? Also, how many lenders would allow people to rely on a repayment vehicle such as an endowment, ISA or pension lump sum unless cast iron guarantees were built in to them? The vast majority of people would (rightly?) be forced onto a full repayment mortgage. This would also make lending into retirement very difficult unless you were on a solid and large final salary scheme with a big employer. Now some fast-track mortgages are perfectly legitimate, but what would be interesting is a bank by bank breakdown of which ones are giving out the most of them.

Lenders will be required to verify any income the borrower declares. This move is designed to cut down on the inflation of wages and mortgage fraud. This effectively kills off the now infamous ‘self certification’ mortgage where the borrower is allowed to make the assessment, or ‘self-certify’ their income. The ‘self-cert’ mortgage was designed for those that had disparate incomes that could not be proven. But with today’s banking and tax procedures as well as the demise of cash makes them harder and harder to justify anyway.

There will be extra protection for ‘vulnerable customers with a credit impaired history’. Many people falling on hard times find themselves paying huge fees or very high rates just to keep their own homes and are usually trapped within very unattractive deals for many years.

One of the drivers that brought this about may have been the drive for competition. Gone are the days of banking with a single lender. People can now spread their assets and liabilities about amongst the institutions. Loans from one, credit cards from another and mortgage from elsewhere with what little savings they have with someone else. A serial Buy-To-Let landlord will have mortgage spread far and wide. Then with three credit referencing agencies (Equifax, Experian and Callcredit) all with different information, it becomes very difficult for a lender to assess anyone’s true ability to pay.

What we may therefore see is a forced return to one client one bank. Or you get no mortgage, loan or credit card. The law does not support this at present but the FSA’s proposed requirements could well do. The banks will of course like this as swapping accounts would then become very difficult, just like the old days.

One way around this would be to amalgamate the credit referencing agencies into a single charity based unit with a statutory requirement that all loans be properly recorded and updated with them or they become unenforceable by the courts. Then people can still swap accounts and lenders can properly assess affordability.

The FSA proposals will leave some worried that, when the remortgage comes up on their large sized, high loan to value self cert mortgage, they might be left high and dry on the lender's standard variable rate.

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